Additional Revenue Growth Makes Organigram A Buy

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About: Organigram Holdings, Inc. (OGRMF)
by: Wilsonville Capital
Summary

Organigram bills itself as a licensed producer of dried cannabis and cannabis oil in Canada.

Investors should appreciate that the company expects to release a new brand called Trailer Park Buds in 2019. As a result, revenue could increase in the next months.

Assets increased quite a bit as compared to the figures reported in the quarter ended August 31, 2018.

The revenue growth reported in November was quite impressive. Net revenues were equal to $12.4 million, 420% more than in the same quarter in 2017.

Having mentioned this feature, Organigram is trading at only 10.26x, which seems undervalued. Other competitors are trading at 11.65x-80x sales.

With more than 60% stock returns delivered in about two months, Organigram (OTCQX:OGRMF) still seems undervalued. Other competitors are trading at larger capitalizations and are not reporting the same revenue growth. Additional stock returns could be expected if the shares are traded on the NASDAQ or the NYSE. In addition, a new brand is being released in 2019, which could lead to additional revenues. With all this in mind, this cannabis stock seems to be a great name to be followed closely in the following months.

Business

Organigram Holdings is based in New Brunswick and was created in 2010. The company bills itself as a licensed producer of dried cannabis and cannabis oil in Canada.

With several brands in the market, investors should appreciate that the company expects to release a new brand called Trailer Park Buds in 2019. As a result, revenue could increase in the next few months, which could lead to additional share price appreciation. The image below provides further details on different brands offered by Organigram:

Source: 10-K

Like other marijuana producers, Organigram is increasing its inventory and investing massively in new property and equipment. Production capacity is increasing, which is leading to both revenue growth and profitability

Investors looking for high growth and a bit of unknown stocks should review this name. The fact that the shares are trading over the counter in the United States is keeping non-sophisticated investors away. This situation is creating a magnificent trading opportunity.

Balance Sheet

Assets increased quite a bit as compared to the figures reported in the quarter ended August 31, 2018. As of November 30, 2018, Organigram reported a 21% increase in the total amount of assets as inventories increased by 103%, and property, plant and equipment increased by 21%.

The amount of cash owned by Organigram is quite significant. Cash held is equal to $30.1 million, and short-term investments are equal to $65 million. This is very positive. It shows that the company has liquidity to increase its level of inventories and continue developing properties in the future. Investors should not fear equity sale in the near future.

The image below provides further details on the list of assets:

Source: 10-Q

While the amount of liabilities increased by 15% in the most recent quarter, the company does not show financial risk. In addition, the amount of financial debt does not seem large. The largest obligations are long-term debt worth $12.6 million and unsecured convertible debentures worth $85 million. Please keep in mind that the cash in hand is larger than the long-term debt, which conservative investors should appreciate. The image below provides further details on the total amount of liabilities:

Source: 10-Q

Regarding the convertible debentures, investors need to note that they have a maturity of January 31, 2020. The image below provides further details on these convertible debts:

Source: 10-K

420% Revenue Growth In The Quarter Ended November 30, 2018

The revenue growth reported in November was quite impressive. Net revenues were equal to $12.4 million, 420% more than in the same quarter in 2017. In addition, it is quite beneficial that the gross margin increased from $1.31 million to $51.7 million as cost of sales did not seem to increase as much as revenue. On the top of it, net income was equal to $29 million, a great figure taking into account the net income losses reported in 2017. The image below provides further details on this matter:

Source: 10-Q

In 2018, the revenue increased from $3.2 million to $44.82 million, which means a 1,300% increase. In the new quarterly report, revenue growth did decline, but growth investors are not expected to complain about it. There are not many marijuana companies out there reporting triple-digit revenue growth with positive net income.

Negative Cash Flow From Operations

While growth investors may not care about the cash flow from operations, value investors may not appreciate this feature. The company reported a CFO of -$14 million, a loss four times larger than the figure reported in the quarter ended November 30, 2017. While what matters is usually annual CFO, investors should be interested in the quarterly CFO. The image below provides further details on this matter:

Source: 10-Q

Recent Returns And Valuation

Since Wilsonville Capital released its most recent article on this name, the stock price increased from $3.12-$3.20 to more than $5. The stock returns are equal to approximately 60% in less than a two-month period. The image below provides further information on the recent share price dynamics:

Source: Chart - Seeking Alpha

The assessment of the valuation made in December does not seem valid anymore as there is new information. Wilsonville Capital assumed forward revenues of $100 million, which seems right now a bit optimistic. The image below provides further details on the assessment made in December:

Source: Seeking Alpha

In the most recent quarterly report, net revenues were equal to $12.4 million, 420% more than in the same quarter in 2017. Taking into account the new revenue growth, forward revenues of $65 million seem more reasonable.

As of February 11, 2019, with 130 million shares outstanding at $5.11, the market capitalization is $664 million. Deducting cash and short-term investments of $95 million and adding debt of $97 million, the enterprise value equals $667 million. With this figure in mind, Organigram is trading at 10.26x.

Organigram seems to have larger revenue growth than peers and similar gross profit margin. The images below provide further details on this matter:

Source: Ycharts

Source: Ycharts

Having mentioned this feature, Organigram is trading at only 10.26x, which seems undervalued. Other competitors are trading at 11.65x-80x sales, and they don’t seem to be growing revenues at a larger pace than Organigram. The image below provides further details on this matter:

Source: Ycharts

Why Is The Company Undervalued?

The fact that the company does not trade on the NASDAQ or the NYSE seems to explain a lot about the current situation. Keep in mind that the amount of liquidity in the OTC markets is less than that on other larger exchanges. Reduced amount of liquidity tends to push the share price down.

Investors should understand very well that this situation is an interesting opportunity. If Organigram is able to sell shares on the NASDAQ or the NYSE, the share price should increase. In this particular case, the company may trade, like other peers, at 31x sales or $15.48.

Conclusion And Largest Risks

As per the new 10-Q, net revenues increased by 420% as compared to the same quarter in 2017. The revenue growth does not seem as large as in the past, but few growth investors may complain about it. With the new figures in mind, Organigram is trading at only 10.26x, which seems undervalued. Other competitors are trading at 11.65x-80x, and they are not growing revenues at the same rate.

After delivering more than 60% stock returns, investors should still see Organigram as an opportunity. If the shares are traded on the NASDAQ or the NYSE, the stock returns could be quite impressive. In this particular case, it could trade at 31x sales or $15.48.

Organigram has to pay a large amount of debt on January 31, 2020. The current amount of liquidity seems enough to pay it. With that, determining whether the amount of cash in hand in 2020 will be sufficient to pay the debt and finance the working capital is quite difficult. If the company needs additional cash, it will need to raise equity, which could lead to share price depreciation. That’s a serious risk, so investors need to follow the amount of cash in 2019.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.